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Will Congress lift moratorium on Internet sales tax?

As the Internet increasingly becomes a place for people to shop and do business, the federal government wants a piece of the action. Several proposals are making the rounds of Congress that would undo a moratorium that blocks states from imposing their own taxes on Internet access, reports Wired NewsAt issue is a 1998 federal law prohibiting states and municipalities from taxing Internet access the way they do telephone service.
Written by Richard Koman, Contributor on

As the Internet increasingly becomes a place for people to shop and do business, the federal government wants a piece of the action. Several proposals are making the rounds of Congress that would undo a moratorium that blocks states from imposing their own taxes on Internet access, reports Wired News

At issue is a 1998 federal law prohibiting states and municipalities from taxing Internet access the way they do telephone service. Four bills, two in the House and two in the Senate, would extend the moratorium or make the law permanent. But if Congress fails to take action, broadband companies fear a raft of new taxes will cost them customers.

"New taxes on internet access could have a chilling effect on broadband investment ... and impose significant new costs (on consumers)," Annabelle Canning, Verizon's vice president of state tax policy, told Congress last month.

Increasing Internet bills by 10 or 20 percent from new local taxes could have a huge impact on broadband, according to Jerry Ellig, a research fellow at George Mason University's Mercatus Center and a former Federal Trade Commission economist. One of the most important things that economists know about broadband access is that it's pretty price sensitive," Ellig says.

States want to be able to tax services that come with Internet access that aren't currently being taxed, says David Quam, the director of federal relations for the National Governors Association, which opposes making the moratorium permanent. "Just because a service can be provided over the internet does not make that service tax free," Quam says. "That was never the intention of Congress."

One of the proposals would extend the tax ban until 2011, while grandfathering in sales taxes from a handful of states that were doing so prior to 1998. There are some fears that letting the moratorium expire would be akin to letting the flood gates of taxation open. Everything from email to broadband access might be subject to a tax. But this scenario is unlikely, said Bartlett Cleland, senior director of tax policy for the Information Technology Association of America.

"You're already paying tax on telephone or cable. Paying taxes on top of that would not only be unfair to many businesses but a hard sell for Congress. Someone will have to say, 'I support discriminatory taxation,'" said Cleland. "That's why every year when we get to this debate, Congress (allows the moratorium to continue)."

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